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 Outflows from four of the largest oil-specific exchange traded
funds, including the largest U.S. Oil Fund <USO>, reached $338
million in two weeks to April 8, according to data from
ThomsonReuters Lipper. That is the first two-week outflow since
September and the biggest since early 2014, marking a turnaround
from heavy inflows in December and January on bets that oil prices
would quickly rebound from six-year lows.
If the exodus gathers pace it could signal new pressure on crude oil
prices that had begun to stabilize at around $50 a barrel this year
following their 60 percent plunge, says John Kilduff, a partner at
energy fund Again Capital LLC in New York.
Retail investors may have been "trying to bottom fish and got washed
out with the recent new low," he said.
Global oil ETF holdings were equivalent to 150 to 160 million
barrels' worth of crude oil futures as of last week, according to
ETF Securities. That would represent as much as 30 percent of open
interest in the most-liquid U.S. oil futures contract, which saw
record open interest of 530,000 lots in March, although some of
those fund holdings are in other contracts.
It is probably premature to say the two-week outflow marks a
sustained sell-off that could trigger another slide in crude prices
given the ETFs saw their biggest ever weekly inflow of $818 million
just weeks earlier.
In any case, the funds have become an unpredictable irritant for
Saudi Arabia and other OPEC producers, first slowing the slide in
prices that could force higher-cost producers such as U.S. shale
drillers to curb output, and now blurring the outlook.
"Passive investors have become a problem," Philip K. Verleger, a
consultant and energy economist, said in a note on Monday. ETF
inflows are "denying those in the Middle East the decline in
non-OPEC output they hoped to achieve".
LONGS UNRAVELING
Traders say two factors may be behind the recent exodus.
First, there is a growing sense that any rebound in crude prices may
be months if not years away. Secondly, there is a growing awareness
of the financial penalty of the current "contango" market, in which
investors must sell cheaper near-term futures contracts to buy more
costly next-month contracts every month.
Recently, top producer Saudi Arabia said it pumped more crude than
ever before in March; Iran reached a framework deal with western
powers that may unleash a torrent of oil next year; and U.S.
stockpiles continue to set record highs.
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"The news lately has been uninspiring. Investors don't want to be
long and wrong in perpetuity," said David Mazza, head of research at
State Street Global Advisors, an institutional asset management firm
with more than $2.4 trillion in assets.
A market configuration where futures contracts months ahead are more
expensive than the near-term ones makes holding on to long positions
increasingly costly.
For instance last week, when the United States Oil Fund ETF began
rolling its positions, the May contract was trading at between $1.25
and almost $2 a barrel below the June contract . The fund had rolled
more than 40,000 lots to hold some $2.2 billion worth of June
futures by Friday; it still had another 14,000 lots to roll forward,
fund data showed.
The USO fund has fallen by more than 9 percent since the start of
the year, whereas front-month U.S. oil futures have dipped by less
than 3 percent, data show, on account of roll costs.
USO manager John Hyland says investors tend to redeem when prices
rise - as they have since mid-March - and invest when they fall. He
refutes the idea that ETFs cause prices to move.
Since March 18, the total number of shares outstanding is trending
down, he said. "You'll see that our move lags the prices, not the
other way around: The price started to go up first, and then our
shares started to decline."
(Reporting By Catherine Ngai and Barani Krishnan; Editing by
Jonathan Leff and Tomasz Janowski)
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